RBI will raise rates – Sensex 18700 or lower an entry point

In the last two sessions the drop in Sensex has been majorly due to the banking index and Reliance. Many PSU banks have dropped 5-10%. Is it because of a downgrade by Morgan Stanley or is it the sudden change in expectation of RBI rate hike from 0.25 bps to 0.50 bps.

Seems Index is factoring in a 50 bps hike but for use would stick to the technical levels. 18700 the previous breakout point will be a good entry point on declines. The gap support at 18373-18480 also remains a very strong support.

We may expect the index to bounce to 19k post a dip to 18700 or lower. Buy on dips with a stoploss of 18370.

Nooresh has written 2708 articles.

After today’s development, i feel for next 3 months, one should trade cautiously in interest rate sensitives: Financials/Real Estate/Auto. Banks will be under pressure as they will find it difficult to maintain their NIM’s due to:

Time Lag to pass the rate hike to end users, the effect of which will be visible in June and September 2011 numbers.
Savings rate increased to 4% from 3.5% will further dent margins
Loan Disbursement/Credit Growth target will be difficult, as demand will slow down.
Higher Provisioning in sub standard loans declared by RBI
More NPA’s expected in Power/Infra/Real Estate

So it will be good for investing, once the BANKEX stabilizes and quality stocks come at decent valuations.

Presently, i would like to focus on Dividend paying stocks and defensives in Pharma/Education/FMCG and select commodities.

Banks have dropped 15 % so its been taken into the price. But from the policy announcements and general understanding over next 2 qtrs we might be peaking out on Interest rates which seems to be more interesting to me.